JOHCM Global Opportunities Fund | 10th Anniversary
The team have a thoughtful and fully-integrated approach to Sustainability, taking a forward-looking perspective in order to identify and engage with agents for long-term positive change, rather than a backward-looking exclusionary approach.
The team explain the fund's ESG process
The team have a thoughtful and fully-integrated approach to Sustainability.
The team see climate change from several different angles. There is regulatory risk as states push companies into regimes requiring compliance with tighter, more challenging rules. There is reputational risk, as consumers become increasingly aware of environmental depredation and look to spend on brands they see as clean or working to reduce emissions. There is legal risk, should companies fail to disclose activities that are known to be harmful.
No specific activity will exclude a company from the fund. Some activities, such as cracking oil, emit significant quantities of greenhouse gases, but for now they are economically essential. In looking for growth in long-term value, the team will want to know that a company engaged in this kind of activity has a viable understanding of evolving social attitudes and regulatory development. Are its disclosures adequate? Does it have meaningful goals for change? Is it doing what it needs to do to avoid harm?
The team maintain a scorecard to assess each company’s exposure to climate change. Evidence is gathered both directly and from third parties, such as Sustainalytics, and seen as a dynamic mosaic. The object is to understand risk rather than to determine whether or not a company is investible as such.
The assessment looks at a company’s ‘harmfulness’ and juxtaposes that against its commitment to accountability, with an emphasis on products for which it is directly responsible as opposed to those it might buy through a pool. The approach is additive, recognising that companies will inevitably have multiple exposures. Engagement tends to focus on disclosure, ensuring that investors have the information needed to make valid decisions.
An example of a recent engagement was with the Texas utility Atmos. The team have had regular communication with senior management, both formal and informal. They have specifically asked that the company adopt holistic carbon targets, rather than just for methane, and that management remuneration be linked to achieving those targets. The company has accepted the team’s position and plans to adopt the SEC framework for standardised disclosure.
In looking for growth in long-term value, the team will want to know that a company engaged in this kind of activity has a viable understanding of evolving social attitudes and regulatory development.
Defence companies have clear strengths, including high barriers to entry and stable returns. But they carry significant social and commercial risks that need to be managed through effective product control. Offensive weapons have the greatest risk. But munitions and missiles, though classified as defensive, can still cause substantial harm when in the wrong hands.
There are three area investors need to consider:
These issues impact ESG considerations. They also present reputational and liability risks similar to those experienced by tobacco companies in the 1990s.
We set out to understand which companies are most at risk. We started with the munitions and missiles segment of the US defence research budget, which in fiscal 2021 accounted for around $20 billion of the total spend of $176.6 billion. The majority of the budget goes to Lockheed Martin and Raytheon Technologies, with smaller shares going to Boeing and Northrup Grumman. Other companies, including Northrup, L3Harris and Aerojet Rocketdyne, have exposure through supply of components, such as motors and guidance systems. MBDA of France and Norway’s Kongsberg are significant in the missile segment.
Having defined the major players in munitions and missiles, we set out to identify the firms with exposure to overseas sales, focusing on the Middle East, a region that spends heavily on defence and where high and persistent political tensions are currently being expressed through military force. Here again, Raytheon and Lockheed Martin are the by far the largest suppliers, followed by Boeing and Northrup, with minor exposure affecting Textron, General Dynamics and L3Harris.
We felt that further work on controls over bribery and corruption would be warranted, but we noted that Thales has qualified for ISO 37001 certification for its anti-bribery management, including improved reporting and disclosure. L3Harris has made a substantial effort in recent years to put much more detail into its disclosures.
We should also note that defence companies are investing heavily in electronics, communications and intelligence equipment, development streams that offer lower risk business lines than conventional munitions and missiles.
Nevertheless, the evidence of strong concentrations crossing munitions and missiles with business in the Middle East is clearly significant in its own right. Given the size of these firms and their deep entrenchment in the US defence budget and in US foreign policy, it was highly unlikely that direct engagement would have an impact.
It was clear from the research that a small number of companies had significant exposure both to the high-risk segment of munitions and missiles and to sales to Middle East, a tense, volatile and militarised region. These were Lockheed Martin, Raytheon Technologies, Northrup Grumman and Boeing from the US, MBDA from France and Kongsberg from Norway. The decision was taken to sell to zero the one holding we had in this group.
By contrast, we see that L3Harris and Thales have relatively low exposure both to munitions and missiles and to the Middle East, though we would like to know more about Thales’ exposure to missiles. But we felt both firms offered strong potential with minimal and reasonably transparent exposure to the sector’s critical risks.
We felt both firms offered strong potential with minimal and reasonably transparent exposure to the sector’s critical risks.